Interest rate rise will come next summer, economists predict

The UK’s first interest rate rise will come no earlier than July next year but probably by the end of September, according to economists polled by Reuters.

It found that 32 of 50 mainly City economists forecast the Bank of England’s base rate will increase to 0.75% in the third quarter of 2015, six months later than previously thought.

The revised forecasts brings the majority of economists in to line with financial markets that were already betting on a first rise late next year.

It seems clear from recent figures that shoppers with mortgages to pay have also concluded that rate rises are fast disappearing over the horizon.

Consumer confidence and retail sales are expected to make for a buoyant Christmas, according to the latest surveys, so those workers in continuous employment and enjoying decent pay rises feel confident a steep rise in monthly costs is not imminent.

Even those on modest incomes getting low pay rises are feeling more comfortable borrowing and spending now that a rate rise could be pushed back even as late as 2016, if HSBC economists are to be believed.

Speeches by the Bank’s chief economist Andy Haldane and governor Mark Carney are behind the sense of relief after they both struck a dovish tone and emphasised that growth may be strong but it is built on weak foundations – in particular, low wage rises and low inflation, holding the monetary policy committee (MPC) back from jacking up rates.

More than 90% of new mortgages being given out are for fixed rates lasting two years or more, according to figures from several brokers.

But most existing mortgage payers are on variable/tracker deals and quite often the standard variable rate if their mortgage is still distressed. Their number could swell if customers conclude that interest rates are simply going to stay at rock bottom for years rather than months.

That said, five-year fixed rate deals on offer at 2.5% (for those with high levels of equity or large deposits) could prove tempting enough to continue the trend because they appear to be a zero-cost hedge against future rises. And to some extent, apart from an arrangement fee, they are.

Peter Dixon, economist at Commerzbank, told Reuters: “Following the recent downgrade of the BoE’s inflation forecasts, which I fully buy into, it is difficult to see the MPC pulling the interest rate trigger any time soon

“I certainly don’t see a rate hike until such times as the inflation rate has stabilised ... particularly in view of the mounting evidence from Sweden that the Riksbank acted too hastily to normalise policy.”

Stockholm tried to raise rates to more “normal” levels only to find the extra borrowing costs killed off high street spending and sent economic growth into reverse. Rates touched 2% in 2011 only for them to slump back to 0.25% to prevent a full-blown deflationary spiral.

Looking forward to next Wednesday’s autumn statement, George Osborne is in a trap set by the financial crash, which robbed companies of their willingness to invest and left the economy at the mercy of consumer confidence and high street spending. If low rates come to an end, the tills will stop ringing. Do not expect a rise for at least a year, possibly two or three.